Which of the following does not assist in ensuring managers act in the best interest of owners?
A) A compensation package for managers that ties their salary to the ﬁrm's share price.
B) Managers are promoted only if the ﬁrm prospers.
C) The threat that if the ﬁrm does poorly, shareholders will use a proxy ﬁght to replace the existing management.
D) There is a high degree of likelihood the ﬁrm will become a takeover candidate if the ﬁrm performs poorly.
E) A compensation package for managers that is all cash with no ties to performance.

Question

Quizplus · Accepted Answer

A compensation package with no ties to performance does not incentivize managers to act in the best interest of owners. In fact, it may even encourage a lack of motivation to improve the firm's performance. On the other hand, compensation packages that tie salary to share price or promote based on the firm's prosperity and the threat of a proxy fight or takeover all create incentives for managers to act in the best interest of owners.

Which of the Following Does Not Assist in Ensuring Managers